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Sunday, January 23, 2022

MSP is necessary to make farming viable

🔴 M S Sriram writes: A legal guarantee will only assure the farmers that they will not be bankrupted

Written by M S Sriram |
Updated: January 15, 2022 8:47:41 am
The significance of MSP is only when the markets do not clear the price. In such a situation, the farmer gets a return less than the MSP and by this argument we are escorting the farm fraternity towards bankruptcy. (File photo)

There has been significant writing about the dangers of providing a legal sanctity to the Minimum Support Price (MSP), including in this newspaper by Ashok Gulati (‘The fallacy of MSP’, January 4). The broad strands of argument are: One, providing MSP does not allow the market to discover the prices; if market cleared prices are less than MSP, then the only buyer would be the government; this would render the government bankrupt. Two, markets are wonderful; if they have any distortions, the way to negotiate it is through Farmer Producer Organisations (FPOs) — as demonstrated by Amul. Three, a better way to address the possible income gap is to give an income support-based direct benefit transfer (DBT).

There are other arguments, but let us address these issues first. How do we define markets? What are the boundaries? Through tariffs and other measures, we have built a national barrier on markets, where gates are opened on the basis of strategic intent. If we were to open our borders for free movement of grains from elsewhere, we may even argue for unlocking agricultural land for more lucrative purposes without worrying about food self-sufficiency, buffer stocking and domestic food safety. We are not going there. We may have to accept a national food safety for at least the essential foodgrains and pulses.

Let us look at what the minimum support price does in terms of signalling, and when provided as a legal guarantee.

If we were to look at farming, we realise that this exposes itself to disproportionate risks. First, there is no stop-loss mechanism after sowing the seed, except for destroying the crop for the season. The farmer’s hands are tied and she is locked into a given crop once the germination happens all the way till the harvest. This enterprise not only has the usual business risks but also has the enhanced risk of the force majeure elements that destroy the enterprise — a sudden hail storm, drought, unseasonal showers, a pest attack, a locust attack — there are too many things that the farmer cannot control. These entrepreneur-farmers are operating without a limited liability clause — with no downside protection. Therefore, an MSP provides a powerful signal to the farmer to exercise the choice of sowing a particular crop because the farmer can back-calculate the expected margin. On the other hand, we can stretch the market argument to the limit, we can argue that we do not even need a token MSP. Farmers can enter into a contract in the futures market. But we are looking at people who operate on the margins, on the farms and not people who want to mix up their lives with speculative trade on the screen. If MSP is a signal that helps the farmer to choose a crop, then it must remain a choice at the harvest time as well. If not, then the price is a token announcement. Therefore, a legal guarantee is in order.

Note that the M in MSP stands for minimum – the bare essential to make the farm viable. Clearly if the wonderful markets clear this price, then both the signalling and legal guarantee are irrelevant. The significance of MSP is only when the markets do not clear the price. In such a situation, the farmer gets a return less than the MSP and by this argument we are escorting the farm fraternity towards bankruptcy. A legal guarantee is, therefore, needed. The ability of the state to address the issue is greater than that of an individual marginal farmer.

The argument that the state will have to procure all the floating stock in the market and may become bankrupt is fallacious. The intervention of the state in the markets usually covers information asymmetry, arbitrage and cools the markets when they get overheated. Anybody who looks at the intervention of the central bank in the forex markets would know the importance of market intervention operations. In the case of agriculture, the issue is more than just volatility management.

While the income support scheme is an interesting instrument and is crop agnostic, it does not address the issue of viability of the farming operations. There is no doubt that we need to make farming viable. It is important to address the prices of each crop as a strategic signalling mechanism: For crops that would be encouraged and those that would be discouraged. It may be a good idea to declare a low MSP upfront that is legally guaranteed so that the farmers are encouraged to move to an alternate crop. This would need imaginative decentralised thinking because these have regional implications. If these have regional implications, then naturally restrictions on free movement would also be in order.

We need to modernise the markets and storage and processing facilities. There is no point in conflating modernisation with liberalisation.

The question of how Amul and dairying in India succeeded also needs interrogation and elaboration. While the Amul model recognised the inherent power of markets, it took about five decades to make the system competitive — the investments were made in breed improvement, free veterinary services, better cattle feed, capital subsidy for processing plants, and return-free capital as investments. The nature of subsidies was smart and innovative. If we need to take Indian agriculture on the path of Amul, we need to start making those investments now. As a trivia, dairying was the last bit to be liberalised, and it enjoyed protection even when we opened up in 1991. So let us use the MSP framework smartly on diversified crops, on a decentralised basis while we develop the markets. A legal guarantee will only assure the farmers that they will not be bankrupted.

This column first appeared in the print edition on January 15, 2022 under the title ‘The bare minimum’. The writer is with the Centre for Public Policy, IIM, Bangalore

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